Electric car batteries drive prospects at Regency Mines RGM

13 Jan 2018

After ditching Regency Mines (LSE:RGM) during the second half of 2017, AIM investors’ ears once again pricked up on Thursday when the metal explorer and producer posted a re-focused strategy and several positive developments. The company, which had for a long time generated a buzz around prospects at its Rosa coal mine, rose 13.6pc to 0.6p after announcing that it will ramp up activity at its cobalt and nickel mine and erase all debt from its balance sheet.

Regency, which also reiterated plans to increase ownership of Rosa to 100pc, said the moves for part of plans shift the market’s focus towards its involvement in the electric battery industry, which continues to experience high growth. With Regency offering plenty of upside, the market’s return to the stock will help to cover the firm’s future funding requirements, allowing it to develop operations further. As far as we can see, this is a win-win for early investors.

(E) Battery powered

After an initial period of excitement, Regency saw its share price decline throughout H2 2017 after poor performance at the Rosa coal mine meant that hopes for early cash flow from its initial investment in the site were not met. In its update to markets released on Thursday, Regency said its board believes there is an opportunity for re-setting the market’s valuation of the firm by achieving recognition of its position in the ever-growing battery metals market.

Regency chairman Andrew Bell believes a slow recovery in nickel and cobalt price driven by increasing demand for electric vehicles is likely to be sustained after years of price depression in the markets. Indeed, the prices of nickel and cobalt have been on the rise since late 2015 after a near nine-year bear market, and rose 28.3pc to $12,642/oz and 129.8pc to $75,250/oz respectively over the last year.

On Thursday, Bell said: ‘Regency Mines faces a significant opportunity in the fast-evolving battery metals sector. We intend to focus on the nickel/cobalt sector, while still proactively developing our hydrocarbon and coal interests with a view to achieving early cash flow.

‘We believe we can find value creation opportunities for shareholders as EV battery and power storage demand see advances in battery technology and this leads to changes in the pattern of demand for key metals’.

In order to trigger a re-rating, Regency plans to rebrand its nickel/cobalt and related assets as a battery metals function, as these are the two metals chiefly used in the production of electric vehicle batteries and related energy technologies.

‘Regency is becoming one of the small but growing number of listed companies in London with significant interests in battery metals and materials,’ the firm said. It will also step up activity at Mambare, its chief nickel and cobalt mining exploration asset, based in Papua New Guinea. The move will likely be music to the ears of Regency investors, with Mambare already proving its upside potential. Regency has already achieved a resource of 1.5m tonnes of nickel and 146,000 tonnes of cobalt by testing just 3pc of mineralised plateau at the mine.

In an interview with ValueTheMarktes.com last month, Bell said he hopes to bring in a partner on Mambare to help bring it closer to production. The firm’s increasing focus on the electric battery market has been on the horizon for some time. For example, it announced the formation of a subsidiary company in December to invest in Tesla’s car hire business White Car Limited. Although the White Car investment looks a little on the spurious side, Bell is adamant this is part of a long-term strategy.

We will see about that, but it is clear that Regency is currently undergoing significant restructuring. In November it sold off its remaining interest in Horse Hill – which has generated £1m in profit – and set up a new battery and storage technologies division to house its nickel/cobalt project.

Whether or not Regency will achieve recognition as a major beneficiary of the electric car battery market remains to be seen. However, the 13.6pc increase in the firm’s share price on Thursday suggests it is moving in the right direction.

What debt?

In order to give itself further flexibility in the electric battery market going forward, Regency also announced on Thursday that it plans to become debt free for the first time since 2011. It has raised £1.1m by placing 190m new shares at 0.55p each – a slight discount to Wednesday’s closing price – with one for one warrants exercisable at a price of 1p per share for 24 months.

The majority of the proceeds will be used to repay in full a £630,000 convertible loan from YA II PN. The loan was issued as part of a rollover of obligations in 2017.

It is also worth noting that Regency also presently has about £2.8m in warrants exercisable at 0.8p, meaning it has potential access to a significant war chest if Bell can deliver his strategy and add value back to the company’s current £3.6m market cap. Underlining this point he said, ‘Regency’s stronger capital base will we believe enable it to exploit more effectively the expected improvement in nickel and cobalt demand, both from the battery and the stainless steel sector.’

The fact that Bell and fellow Regency director Scott Kaintz each contributed £100,000 cash to the most recent placing, may offer some comfort to investors worried about the firm’s faith in its own prospects.

Coal development

Finally, aside from its increased focus on nickel and cobalt, Regency reminded markets that it remains engaged in due diligence talks around increasing its ownership of the Rosa coal mine located in Alabama to 100pc.

As reported by the business in November, US Carbon Resolutions has given Regency an option to buy the 80pc of Carbon Minerals Corporation, the owner of the Rosa Mine, that it does not already own for £250,000.

With Rosa so far failing to deliver cash flow. Bell believes purchasing the whole mine will allow Regency to advance operations and take advantage of high prices for specialist and metallurgical coal.

Regency is also continuing to carry out due diligence on its coal agreement with Legacy Hill Resources, as mentioned in December. The two firms plan to work together to structure, finance, and own coal investments in the US.

‘We expect to devote significant time and effort to high value metallurgical coal opportunities in the U.S. during 2018 and we will advise the market accordingly as transactions are concluded,’ said Bell on Thursday.

Electric dreams

The key point here is that Regency is keen to make a better job of convincing markets that it is well placed strategically so it can initiate and build production. If investors return to the stock then all will benefit as Regency’s medium to-long-term funding requirements are fulfilled, meaning it can develop more effectively than currently allowed by its small market cap.

From a technical perspective the chart is encouraging with the company’s share price having confirmed and consolidated at long term support.

Whether you to take a punt depends on how convinced you are by Bell’s arguments. With Regency’s Mambare mine offering plenty of upside, debt being erased and coal prospects looking strong, plenty of compelling arguments exist. At just 0.6p, shares look cheap and could present quite an opportunity.

DISCLOSURE

The author of this piece does not own shares in any of the companies covered in this article.

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

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